I recently fielded a couple of questions from readers interested in the Forex market, including one that relates to last week’s U.S. dollar "eggs all in one basket" article. The second question came from someone just starting out in Forex trading and has to do with the "seed money" needed to begin trading.

Q) Reports coming from the U.S. are pointing toward a slowing economy combined with higher inflation. Would you comment on the consequences of a slowing-economy scenario for the USD?

Great question. When an economy slows, inflation usually subsides. This is because strong growth creates wealth and increases spending, which can be described as too much money chasing too few goods. If a company can sell all the goods it produces at the current price, why not raise prices and see if consumers are willing to "pay up"? Slowing growth tends to reduce these price pressures because goods are no longer flying off the shelves.

The wild card in this scenario is the price of energy products. Imagine this scenario: If the price of energy (gasoline, heating oil, jet fuel, etc.) is consistently rising, this will affect the personal finances of individuals in a negative way. People in general will have less money to spend on other things if a greater part of their budgets are spent on energy products, and this could cause growth to slow. Slower growth is a potential side effect of higher energy prices.

Unfortunately, higher energy prices can simultaneously boost inflation. For example, consider the goods for sale on the shelves of your local supermarket or shopping mall; many of these products are transported via vehicles that burn oil and gasoline, and now the cost of operating these vehicles is rising. Companies will try to absorb the higher cost to remain competitive, but, at some point, these higher prices may be passed on to the consumer. Also, energy prices are often a factor in the manufacturing process, and because of this, the prices of many manufactured goods may also rise.

The previously described scenario puts the Federal Reserve between a rock and a hard place because one of the Fed's key tools used to fight inflation is a higher interest rate. This tends to slow growth and reduce price pressures. The problem is, strong growth is not the cause of this current round of inflation, and higher interest rates will exacerbate any economic slowdown. Meanwhile, lower rates could further ignite inflation.

Which way should the Fed turn in this type of scenario? My opinion is that growth will slow enough to allow the Fed to cut interest rates several times before the end of the year. Falling interest rates tend to have a negative effect on the underlying currency, in this case, the U.S. Dollar. The USD is already on shaky ground, and a drop in the price of energy could provide welcome relief for Dollar bulls.

However, I am troubled when I hear pundits on CNBC and elsewhere make assumptions that energy prices will fall. They are falling into the trap of believing that prices are artificially high and must revert to earlier levels. While I would love to see oil reach new lows, I can't allow that desire to cloud my judgment.

Just as with the price of any stock or a currency, the price of oil doesn't "have to" do anything, and if it were really worth less than the current price, the cost would fall immediately to reflect that fact. The truth is that, at any time, no one knows with certainty which way energy prices will go next.

Q) How much do I need to get started realistically in the Forex market? I was going to start out with about $2,000. Would that be feasible? Should I consider a mini account?

I'm sure U.S. stock traders are familiar with the Pattern Day Trader (PDT) rule, which places certain trading restrictions on accounts that have a balance of less than $25,000. The good news is that the Forex market (a) has no such PDT restriction and (b) offers mini accounts that allow traders to reduce their risk substantially by trading positions that are only a fraction of the size of standard Forex positions. You could sufficiently fund a mini account with $2,000 USD and trade without restrictions.

Many Forex brokers and market makers allow customers to fund accounts with just a few hundred dollars, but I don't recommend doing this. To use good risk management, you must have enough leeway to allow your trades to run without risking too great a percentage of the account on any one trade.

When we attempt to trade with a few hundred dollars, we are "painting ourselves into a corner" and limiting our options. The result is usually a stop that is too close or a level of risk not conducive to good trading.

Instead of trading with too little capital, use a demo account to gain trading experience without risking any of your own capital. Simply Google the term "forex demo account", and you'll see numerous free practice accounts available for download. Most of these offer real-time quotes and charts.

*Reprinted (and modified) with permission from Online Trading Academy (www.onlinetradingacademy.com)